CSLB C-33 Painting & DecoratingBusiness and Project ManagementHard
A painting contractor is reviewing the profit and loss (P&L) statement for the previous fiscal year. Which of the following entries would be categorized as a 'cost of goods sold' (COGS) rather than an 'operating expense'?
- AThe wages paid to administrative staff.
- BPremiums for the contractor's general liability insurance policy.
- CThe cost of paint, primer, and masking tape used directly on client projects.
- DMonthly rent for the contractor's office space.
Show answer & explanationAnswer & explanation
Correct answer: C. The cost of paint, primer, and masking tape used directly on client projects.
Cost of Goods Sold (COGS) includes the direct costs attributable to the production of the goods or services sold by a company. For a painting contractor, this specifically includes the materials (paint, primer, tape) and direct labor used on client projects. Operating expenses are indirect costs not directly tied to production.
Why the other options are wrong
- A. Administrative staff wages are indirect costs, categorized as operating expenses.
- B. General liability insurance is an indirect cost of doing business, categorized as an operating expense.
- D. Office rent is an indirect cost, categorized as an operating expense.
Cost of Goods Sold (COGS)
The direct costs attributable to the production of the goods or services sold by a company, including direct materials and direct labor.
- Directly tied to revenue generation.
- Excludes indirect costs (operating expenses).
- Crucial for calculating gross profit.
Memory trick: COGS 'Counts' what's 'Directly' made, 'Operating' is 'Overhead' instead.